ONLINE EXCLUSIVE: To read a Q&A with Genesco's GC, click here.
As is typical with doomed relationships, the Genesco-Finish Line deal started with a honeymoon period that quickly went sour. Athletic footwear retailer Finish Line Inc., after emerging victorious from a bidding war with competitor Foot Locker and six private equity firms, announced in June 2007 that it would buy Genesco Inc., the Nashville, Tenn.-based retailer that operates stores including Journeys Shoes and Hat World. UBS was to provide financing for the heavily leveraged deal.
Then, in August, Genesco reported a second quarter loss of $4.2 million--a year earlier it had reported a $5.9 million profit. In response, Finish Line issued a statement: "The company is disappointed with Genesco's second quarter fiscal 2008 financial results ... [and] is evaluating its options in accordance with the terms of the merger agreement."
"The current stress in the credit markets is raising the cost of capital and changing the economic assumptions of deals that were modeled a year or so ago," says Dan Brown, a partner in Mayer Brown who spearheaded the firm's Subprime Lending Response Team. "That's going to make potential buyers consider the option of trying to ... walk away from or renegotiate a deal."
Even when these broken deals result in lawsuits, few go all the way through trial. Many companies renegotiate to avoid the cost of litigation, so the Tennessee trial was rare. The fact that the providers of the funding also wanted to pull out of the deal may have propelled the case to trial.
Thus, the Tennessee case hinged on the merger agreement's MAC clause, a typical part of an M&A deal that buyers can use to escape the deal in case the expected economic results change in a sufficiently detrimental way. That change is the "material adverse effect" which triggers the clause. A MAC clause is basically a return policy of sorts. Of course, creating and invoking a MAC claim is more complicated than, say, returning a pair of shoes to the store because they don't fit. For one, MAC clauses vary from agreement to agreement.
"You can't say there's a standard language in a standard MAC clause that's essentially boilerplate in each agreement," Brown says. In the definition of material adverse effect, parties will include and exclude certain things. "There can be exclusions to exclusions. It's that level of detail in material adverse effect that really provides the uniqueness to each agreement," Brown says.